If you wanted to design an experiment to test whether it is better to build a business inside the rules or outside them, you could not do much better than what has actually happened in the American prediction market over the last six years. Two companies, roughly the same product, roughly the same moment in time, and two approaches to the law that could hardly have been more opposed. One treated regulatory approval as the first thing to obtain and everything else as secondary. The other treated it as a problem for later and went looking for users. Both are now very large, both are worth a great deal of money, and both spent this summer in courtrooms defending themselves against the same accusation from the same kind of opponent.
That last part is the interesting bit, and it is the part that anybody structuring a business in a contested area ought to sit with for a while.
The Slow Route
Kalshi was founded in 2018 by two MIT graduates, and instead of launching a product it went and asked permission. The Commodity Futures Trading Commission granted it designated contract market status in November 2020, making it the first federally regulated exchange in the United States built specifically for event contracts. Only after that did it start listing anything.
The years that followed were not glamorous. Getting a licence is one thing; getting the regulator to let you list the contracts your business actually depends on is quite another, and Kalshi ended up suing its own regulator for the right to offer contracts on election outcomes, a step reportedly opposed by some of its own investors. It won that fight in late 2024. Sports contracts followed in January 2025, and those turned out to be the business, generating the overwhelming share of the platform’s revenue almost immediately.
What the slow route bought was not just legality. It was distribution. Because the licence was unimpeachable, regulated counterparties were willing to plug into it, and the platform ended up embedded in brokerage applications and media partnerships that no unlicensed competitor could have reached. That is a compounding advantage, and it is why the funding rounds through 2025 and 2026 escalated the way they did, culminating in a billion-dollar round in May of this year at a valuation of twenty-two billion.
The Fast Route
Polymarket did the opposite, and for a while it looked like the smarter play. It built the product, found an audience, and became a cultural reference point during the 2024 election cycle in a way that a compliance-first competitor never quite managed. The bill arrived in 2022, when the CFTC fined it USD 1.4 million for operating an unregistered facility for trading commodity options and required it to shut American users out. The main exchange went offshore and stayed there for three years, a period we covered in detail in our analysis of Polymarket’s swap-or-wager litigation.
The way back in is instructive because of what it cost. Rather than applying for a licence and waiting, Polymarket bought a company that already had one, paying a reported USD 112 million in July 2025 for a licensed derivatives exchange and clearing house, which converted overnight into designated contract market status. The CFTC issued an amended order of designation in November 2025, and American users returned at the end of that year.
So the licence was available for purchase after all, which is a genuine lesson and not a cynical one. Compliance debt, like any other debt, can be settled later. But it accrues interest. The four years of exclusion, the enforcement history that now sits permanently in the file, the raid, the investigations, and a nine-figure acquisition are the interest, and the company is still operating under regulatory scrutiny that its more patient competitor largely avoided.
Both Roads Lead to the Same Courtroom
Here is where the experiment produces its genuinely surprising result. Neither strategy protected either company from what is now the sector’s central legal problem.
Gaming regulators in more than twenty states have taken the position that a contract on the outcome of a sporting event is sports betting, whatever the federal regulator calls it, and that offering it without a state gaming licence is unlawful. Massachusetts obtained a preliminary injunction against Kalshi in January of this year. Nevada’s position moved against the platform in late 2025 and the appeal is now with the Ninth Circuit. Tennessee ordered contracts voided and deposits returned. The companies have responded by suing states directly, and the federal regulator has taken the extraordinary step of suing states in its own name to assert exclusive jurisdiction over the products it authorises.
The courts are split, and not narrowly. The Third Circuit held in April that sports event contracts are swaps and that federal law displaces state gambling regimes. A district court in Ohio reached the opposite conclusion. In July a judge in the Southern District of New York refused to enjoin New York’s enforcement, finding that the preemption argument fails on every available theory, in substantial part because the Commodity Exchange Act contains a rule expressly preserving state authority over gaming. Everybody involved now expects this to end up in the Supreme Court, and a decision is realistically a year or more away — the same fault line we mapped in our review of the SEC-CFTC regulatory framework.
Notice what none of that has to do with. It has nothing to do with whether the platform obtained its licence honestly, or quickly, or at all. Kalshi did everything in the correct order and is in the same position as the company that spent three years offshore. The reason is that the licence answers a question about who may operate an exchange. It does not answer the prior question of what the instrument being traded actually is, and until somebody with sufficient authority answers that, the licence cannot do the work everyone assumed it would do.
The Lesson Is About Characterisation, Not Compliance
Most founders think about regulation as a checklist of approvals. The more useful way to think about it is as a chain of characterisations, each of which determines the next. What is the instrument? If it is a derivative, one regime applies and one regulator has the say. If it is a wager, an entirely different set of authorities does, and no amount of federal paperwork moves them — a point we set out at length in our earlier piece on CFTC prediction market regulation.
Everything downstream depends on that first answer, and the first answer is not decided by what you call the product in your marketing. It is decided by the contract specification, the resolution mechanism, the economics of the payout, and increasingly by whether a judge in a jurisdiction you have never visited thinks the whole thing looks like a bet. Promotional copy describing a product in gambling terms has a way of reappearing as an exhibit, which is presumably why one of these platforms has been quietly auditing its own advertising.
The second lesson is that geography is a timing decision rather than a solution. Operating offshore genuinely buys time, and time in a fast market has real value, which is why the fast route is not simply the wrong answer. But it does not buy immunity, and the price of coming back later is set by somebody else.
Where Esquare Legal Comes In
This is the work we do. Esquare Legal advises digital asset, event contract and tokenised product businesses on structuring, licensing and regulatory strategy, and we do it across jurisdictions that actually matter for this kind of business, including the United Arab Emirates, El Salvador, the British Virgin Islands and Panama. Our cross-border structuring practice tends to work with clients building things that do not fit neatly into an existing category, which is precisely when the characterisation question becomes expensive to get wrong.
In practice that means we start where most advisers finish. Before the entity, before the licence application, before the term sheet, we work out what the product is in legal terms, which regulators can plausibly claim it, and what the analysis looks like if a court somewhere decides the instrument is something other than what the documentation says. From there we structure the vehicle, plan the licensing sequence across the relevant jurisdictions, and draft the contractual and disclosure documents so that they support the characterisation rather than quietly undermine it.
Kalshi and Polymarket are worth a combined figure that most businesses will never approach, and neither of them managed to buy its way out of this question. A smaller business certainly will not. If you are building in this space, the structuring memorandum is the cheapest document you will ever commission, and the only one that gets more expensive the longer you wait.
Esquare Legal advises prediction market and event contract businesses on structuring, licensing and regulatory strategy. Contact us to talk it through — early is always the better time.
Author: Haider Ali, Associate, Esquare Legal.